- Taxpayers are subject to the new requirements for amended research credit claims beginning January 10, 2022.
- The period to correct deficient claims has been extended to 45 days during the transition period.
- FAQs clarify how required documentation can be submitted.
- Legal challenges to the new procedures may be on the horizon.
Will procedural changes affect your research credit refund claim?
Clarification offers some sense of relief
On January 5, the IRS issued additional information in an updated news release and frequently asked questions (FAQs) relating to the new process for filing research credit refund claims on amended returns. The guidance clarifies several aspects of the procedural changes that were first announced on October 15, 2021 in an IRS Chief Counsel memo, with an effective date of January 10, 2022 (see CLA’s original update). Additionally, the IRS issued an internal memo to its agents on January 3 providing interim guidance on the procedures as well as associated revisions to the Internal Revenue Manual (IRM).
This latest guidance comes after the Chief Counsel memo left a number of questions unanswered. Some clarification was received in November 2021 when Holly Paz, Deputy Commissioner for the IRS Large Business and International division, indicated the new requirements only apply to refund claims for credit on amended returns, which provided some sense of relief to taxpayers and practitioners who feared they might apply to refund claims on original returns as well.
Highlights from the updated guidance
Sixteen FAQs titled “Guidance/Process for Including the Five Items of Information on Amended Returns” were released to help taxpayers navigate the new procedures. Here’s a rundown of some of the most important items:
Extension of time to perfect claims
The IRS’s original announcement in October 2021 called for a one-year transition period after the January 10 effective date wherein taxpayers would have 30 days to “perfect” deficient claims. This period has now been extended to 45 days.
FAQ 8 also provides: “The term ‘perfecting’ means taxpayers are given an opportunity to provide missing information that is required to process the Research Credit refund claim. During the transition period, taxpayers will be notified of a deficient claim and provided 45 days to perfect. This date by which a taxpayer must provide the missing information will be on the letter sent to taxpayers.”
Format for providing supporting information
FAQ 9 states that taxpayers may provide the required information as part of the explanation section of an amended tax return (e.g., Part II of Form 1120X) or as an attachment to the refund claim.
Identification of individuals performing qualified research
The most significant change in the new procedures (and likely the most burdensome for taxpayers) is the requirement to list all individuals performing qualified research by business component and explain what technical information each individual sought to discover. The updates to the IRM state that this information can be provided in a “list, table, or narrative but must include the first and last name or title/position of the person or persons engaged in the research by business component.”
FAQ 10, however, provides: “In lieu of specific names, a taxpayer may identify the individuals who performed each research activity by listing the title or position of each individual. Information may be aggregated as described in FAQ 11 but must identify the specific number of individuals and each individual’s title or position. Note that taxpayers may be asked to provide specific names upon substantive review of the claim.”
FAQ 11 goes on to say: “If you have a group of individuals who performed research activities and sought to discover the same information for a business component, then you may list all employees by name or title/position for that one business component and describe the information they sought to discover.”
The IRS is apparently giving taxpayers some degree of flexibility in how they comply with the employee listing and business component requirement. This may prove helpful for taxpayers with a large number of qualified employees and projects that form the basis of the refund claim.
Taxpayers using statistical sampling
The Chief Counsel memo was silent regarding how taxpayers using statistical sampling could comply with the new requirements. The FAQs now address this issue. FAQ 15 provides that if a taxpayer utilizes a statistical sample under Revenue Procedure 2011-42 to compute its research credit, “the documentation for all units in the sample must contain the first four items of information referenced in [the Chief Counsel memo] and be provided with the claim for refund.”
In other words, taxpayers using a statistical sample are still subject to the new documentation requirements, and such documentation must be provided with respect to all units (i.e., business components and/or employees) comprising the sample.
Commentators have voiced concerns over the new requirements from day one, citing the burden to taxpayers from a compliance standpoint and the short amount of time to prepare for the changes. Some have also questioned the IRS’s authority to make such broad sweeping changes outside of the formal rulemaking and comment process. We will likely see continued opposition to the new requirements and possible challenges to their enforceability in the near future.
The IRS states in its FAQs that it will closely monitor the process during the transition period and will continue to accept feedback from taxpayers and their representatives (submit feedback here).
How we can help
Our dedicated team of R&D professionals continually monitors these developments in order to provide updates as new information is learned. Please contact us to understand how these changes apply to your organization.